Understanding capital gains tax in South Carolina is crucial for homeowners, real estate investors, and anyone selling property. Capital gains tax in sc can significantly impact your profits, and knowing how it works helps you plan your finances strategically. This guide breaks down the essential details, including rates, exemptions, and strategies to minimize your tax liability.
What is Capital Gains Tax?
Capital gains tax is the tax you pay on the profit earned from selling an asset, such as real estate, stocks, or other investments. The profit is calculated as the difference between the sale price and the original purchase price, also known as the “basis.”
Example:
If you bought a home in Charleston, SC, for $200,000 and sold it later for $300,000, your capital gain would be $100,000. Depending on how long you owned the property and your income level, you may owe capital gains tax on this profit.
Types of Capital Gains
Short-Term Capital Gains
Short-term gains apply to assets held for one year or less. In South Carolina, these gains are taxed at your ordinary income tax rate, which ranges from 0% to 7%, depending on your income level.
Long-Term Capital Gains
Long-term gains apply to assets held for more than one year. Long-term gains are generally taxed at lower rates than short-term gains, encouraging long-term investment. While federal long-term capital gains rates depend on income, South Carolina taxes long-term gains as ordinary income as well.
Capital Gains Tax Rates in South Carolina
South Carolina does not have a separate capital gains tax rate; instead, it taxes capital gains as ordinary income. The 2025 tax brackets for South Carolina are:
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0% on income up to $3,200
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3% on income between $3,201 and $6,410
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4% on income between $6,411 and $9,620
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5% on income between $9,621 and $12,820
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6% on income between $12,821 and $16,040
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7% on income above $16,041
Real-life Example:
If your taxable income including a $50,000 capital gain is $70,000, your capital gain could be taxed incrementally up to the 7% rate in South Carolina, in addition to federal capital gains tax.
Federal vs. State Capital Gains Tax
It’s important to remember that in addition to South Carolina state taxes, you may owe federal capital gains tax:
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Short-term: Taxed as ordinary income (10%–37% depending on income)
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Long-term: Taxed at 0%, 15%, or 20% depending on your taxable income
This means homeowners in South Carolina need to calculate both federal and state taxes when planning a sale.
Exemptions and Deductions
Home Sale Exclusion
Homeowners may qualify for the Section 121 exclusion, which allows exclusion of up to $250,000 of gain for single filers and $500,000 for married couples filing jointly if certain conditions are met:
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The property was your primary residence for at least two of the last five years
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You have not claimed the exclusion on another home within the past two years
Investment Property Deductions
Investors can reduce capital gains tax through deductions such as:
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Depreciation recapture: Deduct depreciation previously claimed on the property
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1031 Exchange: Defer taxes by reinvesting in a similar property
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Capital losses: Offset gains with losses from other investments
Example:
An investor who sells a rental property in Greenville, SC, for a $100,000 gain can reinvest in another property using a 1031 Exchange to defer state and federal taxes.
How to Calculate Capital Gains in SC
To calculate your capital gains tax:
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Determine the basis (purchase price plus improvements minus depreciation)
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Subtract the basis from the sale price to find the gain
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Apply applicable state and federal rates
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Subtract any exemptions, deductions, or losses
Example Calculation:
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Purchase price: $200,000
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Home improvements: $20,000
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Sale price: $300,000
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Gain: $300,000 – ($200,000 + $20,000) = $80,000
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Federal tax (15% long-term) = $12,000
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South Carolina tax (7%) = $5,600
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Total taxes owed = $17,600
Tips to Reduce Capital Gains Tax in SC
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Use the Home Sale Exclusion – Ensure you meet the criteria for excluding gains from your primary residence.
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Invest in a 1031 Exchange – Defer taxes by reinvesting proceeds from an investment property into another similar property.
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Offset Gains with Losses – Use capital losses from other investments to reduce your taxable gain.
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Hold Property Longer – Long-term gains are taxed more favorably than short-term gains.
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Track Improvements – Keep detailed records of property improvements to increase your basis and reduce taxable gain.
Real-life Example:
A Charleston homeowner who adds $50,000 in renovations to a house can reduce the taxable gain by the amount of the improvements, saving thousands in state and federal taxes.
Special Considerations for Real Estate Investors
Investors need to pay attention to:
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Depreciation Recapture: Previously claimed depreciation on investment properties may be taxed when selling.
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State Conformity: South Carolina generally conforms to federal rules for capital gains but always verify exemptions and deductions.
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Market Timing: Selling in a low-income year can reduce overall capital gains tax owed.
Filing Capital Gains Tax in South Carolina
To report your capital gains:
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Include the gain on your federal tax return (Form 8949 and Schedule D)
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Report the same gain as part of your South Carolina income on Form SC1040
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Apply any exemptions or deductions to calculate your state tax owed
Important Tip: Work with a tax professional if selling a high-value property to ensure compliance and maximize exemptions.
Common Mistakes to Avoid
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Not keeping proper records of improvements and expenses
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Failing to report gains on federal or state returns
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Assuming all gains qualify for the home sale exclusion
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Ignoring state-specific rules and deductions
Real-Life Case Studies
Case 1: Homeowner in Columbia, SC
Jane bought her home in Columbia for $250,000 and lived there for 10 years. She sold it for $500,000. Jane qualifies for the $250,000 exclusion as a single filer, meaning she owes no capital gains tax on the sale.
Case 2: Investor in Charleston, SC
Mark purchased a rental property for $300,000 and made $50,000 in improvements. He sold it for $450,000. Mark’s taxable gain is $100,000, subject to federal and state taxes. By using a 1031 Exchange to reinvest in another rental, he defers both federal and state taxes.
FAQs About Capital Gains Tax in SC
1. Do I pay capital gains tax on my primary residence in SC?
You may qualify for an exclusion of up to $250,000 for single filers and $500,000 for married couples if you meet ownership and residency requirements.
2. How long do I need to hold property to pay long-term capital gains?
Assets held for more than one year are considered long-term and taxed at lower federal rates, though South Carolina taxes all gains as ordinary income.
3. Can I reduce capital gains tax by making home improvements?
Yes, improvements increase your property basis, reducing your taxable gain.
4. Are 1031 Exchanges available in South Carolina?
Yes, investors can defer taxes by reinvesting the sale proceeds into a like-kind property.
5. Do capital gains affect my South Carolina income tax bracket?
Yes, capital gains are considered income and are taxed according to South Carolina’s income tax brackets.
6. When should I consult a tax professional?
If you have a high-value property, multiple investments, or are unsure about exemptions, working with a tax professional is strongly recommended.
Conclusion
Capital gains tax in South Carolina can impact homeowners and investors significantly. Understanding how it works, using available exemptions like the home sale exclusion, and employing strategies such as 1031 Exchanges can help you maximize profits while minimizing tax liability. Proper planning and record-keeping are essential to ensure compliance and reduce unnecessary tax burdens. Redhead Home Properties emphasizes the importance of consulting experts when navigating capital gains tax for real estate in South Carolina.
